Yahoo's Insanely Bad Deal To Pay Mozilla $496 Million A Year For Nothing Is Headed To Court

In its 23 years of existence, Yahoo made some really boneheaded deals. But of all of them, the deal to become Mozilla's default search engine might have been the worst. In that deal, Mozilla retained the right to walk away and still collect hundreds of millions of dollars a year - if Yahoo was acquired by a new company. Both of those things have occurred recently and now Yahoo's new owner is suing Mozilla.

Photo: Getty

Earlier this year, Verizon bought Yahoo and combined it with AOL into a new company called Oath. As part of the deal, Verizon absorbed Yahoo's bad deals and the looming cloud that still hangs over the multiplehacks that were disclosed in late 2016. One of the agreements that carried over was a 2014 contract with Mozilla to make Yahoo the default search engine in its Firefox browser through 2019. Yahoo's CEO at the time, Marissa Mayer, was in the midst of trying to bring Yahoo back from the brink of disaster. Seeing an opportunity to cut into Google's market share through Firefox's hundreds of millions of users, she reportedly allowed Mozilla to include a clause in the contract that required Yahoo to continue making annual payments of $US375 million ($496 million) through 2019 if Yahoo was purchased by a company that Mozilla didn't want to work with. According to Recode, "it was a scenario that Mayer never thought would happen."

But that's exactly what happened in November. Mozilla launched its new Firefox Quantum browser and changed the default search engine to Google. We don't know how much Google is paying Mozilla for pride of place in its browser, but in 2014, Google shelled out $US323 million ($427 million) to do so. And based on the legal complaint filed by Oath on December 1, it appears Mozilla intends to collect the rest of that $US750 million ($992 million) from Yahoo over the next two years. Oath's suit claims Mozilla improperly terminated its agreement with Yahoo. Mozilla quickly filed its own complaint against Oath, claiming a breach of contract. And the war of words has begun.

Well, technically, the most important words in the documents for eachfiling are redacted. We reached out to both companies for comment but had not received a reply at time of writing. Oath has yet to make a public statement - read into that what you will. Mozilla did publish a lengthy comment on its blog with "as much information as we can in the spirit of our values of openness and transparency". The statement reads in part:

We recently exercised our contractual right to terminate our agreement with Yahoo based on a number of factors including doing what's best for our brand, our effort to provide quality web search, and the broader content experience for our users.

Immediately following Yahoo's acquisition, we undertook a lengthy, multi-month process to seek assurances from Yahoo and its acquirers with respect to those factors. When it became clear that continuing to use Yahoo as our default search provider would have a negative impact on all of the above, we exercised our contractual right to terminate the agreement and entered into an agreement with another provider.

The terms of our contract are clear and our post-termination rights under our contract with Yahoo should continue to be enforced.

An important detail in that statement is the part about "doing what's best for our brand". It's unclear what the exact language was that supposedly allows Mozilla to walk away while still collecting payments, but the Firefox maker asserted that it has carried out a review process that included several factors.

Damage to its brand could be a key defence. Mozilla's status as a non-profit good guy that does what's best for users was tainted when it switched to Yahoo. Even though a user can change the search engine settings, many people just leave the default. And virtually no one believes Yahoo is superior to Google. Throw in the bad optics of being associated with an evil US telecom giant such as Verizon, and it would seem Mozilla has a pretty good case for claiming its reputation would be harmed by continuing the deal.

Even for a huge company such as Verizon, $US750 million ($992 million) is a lot of money. It's unsurprising that Oath would fight this tooth-and-nail. But for Mozilla, that kind of money on top of its standard revenue could be a game changer. If the terms of the contract are as cleanly in Mozilla's favour as they appear to be, Oath is probably hoping to come to some sort of settlement. If Mozilla wants to restore its reputation as the little guy that takes on powerful corporations, it should wring every last dime out of Oath that it can.

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